Should the new packing machine be purchased

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Reference no: EM131393979

Otter Outside Gear must decide whether to replace a 10 year-old packing machine with a new one that costs $153,800. Replacing the old machine will increase net operating income (excluding depreciation) from $70,000 to $110,000 and it will decrease net working capital by $18,000. The new machine falls in the MACRS 5-year class. If the new machine is purchased, it will be sold in six years for $25,000; whereas, if the old machine is kept, it will have no salvage value in six years. The old machine has a current market value of $10,860, and although its current book value is $8,000, in one year the old machine's book value will be zero ($0). The firm's marginal tax rate is 40 percent, and its required rate of return is 12 percent. Should the new packing machine be purchased?

Reference no: EM131393979

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